Virgin Cruises Is Sailing Straight Into U.S. Federal Court

Bloomberg

- Mar 16, 2015 3:00 pm

Skift Take

Virgin may not care about Veitch, but they likely will have to care about the enemies they’ll make in the industry if suppliers, vendors, builders, and ports think that the nascent cruise line is untrustworthy.

— Jason Clampet

Share

Tweet

Share

Post

Send

For years, Virgin Group has tried to break into the cruise industry—a travel market that seems uniquely suited to its chic, saucy brand—without much to show for it.

Now, a retired cruise CEO says he figured out how to launch a line and make investors rich—and that Richard Branson’s company swiped it to start Virgin Cruises.

Cruise lines once sold travelers cruise vacations. Now they sell the ships, featuring a wide array of activities, entertainment and dining options. For investors, however, the newest, most profitable ships are part of large fleets with older vessels that dilute the new oceanliners’ earning power.

Colin Veitch, a native Scot who retired as Norwegian Cruise Lines’ CEO in 2008, said this new era of cruising will be dominated by what he calls “ultra ships,” behemoths that carry so many activities countering cruise stereotypes that the ship becomes its own destination. Veitch points to the success of the Bellagio, a resort aimed at luring Las Vegas avoiders to Sin City for a new type of experience, not focused on gambling or showgirls.

“When I took this to them, it was an epiphany for them,” Veitch said, describing his initial meetings with Virgin executives in early 2011. “It was the secret code for gate-crashing an industry that had been very well protected.” New ships can cost more than $1 billion, and sizable fleets have been needed for economies of scale, given the fixed costs and discounts rampant in the industry. A trio of Miami-based cruise lines, including Carnival’s 101-ship fleet, command about 80 percent of the global cruise market.

Virgin denies the allegations and said it has been investigating the cruise market for more than a decade. “Over the years, we have been in discussions with a number of parties including the plaintiff, and those discussions ceased in 2012,” the company said in a statement. Virgin spokeswoman Christine Choi declined to comment further.

So far, only a handful of new vessels meet Veitch’s definition of an ultra ship, including Royal Caribbean Cruises’ Quantum of the Seas—which carries 4,200 people and offers a shopping mall promenade and a cocktail bar with robot bartenders—and Norwegian’s Epic and Escape ships, the latter arriving in October. The new ships command prices that are 30 to 60 percent above those on smaller, older ships, Veitch said, along with higher on-board spending totals.

The Virgin Cruises business plan was designed to appeal to sovereign wealth funds and private family offices as a “pure play” investment that could tap the returns of new ships without the financial interference of the legacy fleets, he said.

Veitch filed suit in U.S. District Court in Miami last week, accusing Virgin of muscling him out of their partnership in 2012 and stealing his business plan after more than a year of work to secure funds, the concepts for a two-ship fleet, and a German shipbuilder to construct them. The “commercial immorality” lawsuit accuses Virgin of breach of contract, misappropriation, and unjust enrichment, and seeks an injunction to halt Virgin Cruises, which is now being directed by Tom McAlpin, a former Disney Cruises executive, and private equity firm Bain Capital.

Virgin had planned to invest $10 million to $20 million of its own money in the venture, Veitch said. Much of the planning was done under a partnership agreement, and some of his industry contacts provided free labor and consultation, expecting payment when the line launched, he said.

“We strongly believe the [lawsuit] has no merits,” Virgin said in the statement.

Virgin announced its planned cruise business in December, 10 months after Branson leaked some details to a Middle Eastern newspaper. Virgin plans to build two ships and start cruising the Caribbean in about 2020, working with Bain. It’s not clear if the investment bank Allen & Co., which Veitch hired to help attract wealthy investors, is still part of the venture. An Allen executive, Kim Wieland, and a Bain representative didn’t return calls seeking comment.

In a 2011 video prepared to attract commercial banks to the venture, Branson called cruising “strategic and important” to the company’s growth and said Virgin Cruises could become “one of our biggest, sexiest businesses.” He said “we know we can offer travelers something different, something far more dynamic and delightful than their grandmother’s cruise experience,” and criticized a “stale” industry he said didn’t innovate and failed to attract new cruisers. The industry expects a record 23 million people to cruise this year but relies heavily on repeat business because of stereotypes that keep many people from trying a cruise.

Veitch, 59, says he began working on his proposal in 2010 and initially had no plans to attach a well-known consumer brand to the line. Then Allen & Co. suggested that a brand partner would make it easier to raise money, he said. When they had assembled a list of potential partners, it was clear that Virgin was the best choice, given its resonance with affluent travelers, he said.

How different would a Virgin-branded ship be? It’s hard to say. Virgin has released little information, including which company will build its ships. In a video prepared for Virgin Cruises’ planned 2012 road show, a CGI rendering of the 370- yard-long ship shows settings modeled on upscale resorts and boutique hotels, with a heavy use of glass and wood and multiple glass aeries.

Virgin was expected to reap as much as $483 million over a decade after the line’s launch, including its minimum $8 million per year licensing fee, which was to be paid regardless of Virgin Cruises’ financial performance, according to the lawsuit. For his efforts, Veitch stood to earn $315 million.

But “after a year of developing the business, [Virgin] realized this was going to hit the jackpot,” Veitch said, and tried to force new partnership terms on him, dramatically reducing his potential profit.

After the split, Veitch said, he considered forging ahead with his venture, but “it became apparent to me … that having Virgin out there with my business plan would make it very difficult to proceed with the project with another brand.” Instead, he’s gone to court and now, he said, “I’ve got lots of time to spend with my family.”

This article is from Bloomberg and was legally licensed through the NewsCred publisher network.

The Skift Daily newsletter puts you ahead of everyone about the future of travel, subscribe.